Abstract
The study attempts to examine the symmetric and the asymmetric impact of volatility of economic growth on the inequality of income in the major ASEAN economies over the period 1980–2015. Financial development, trade openness as a proxy of globalization, inflation, human capital formation, and fiscal policy are utilized as major control variables. The paper tries to explore the causal association between inequality of income distribution and economic growth volatility, exploring simultaneously the long-run association and the short-run dynamics in the time series structure. The study applied Clemente–Montanes–Reyes unit root test to identify the structural break in the time series. Further, the cointegrating relationship of the time series observations was explored by applying the ARDL (linear) bounds test approach along with the nonlinear ARDL for making fruitful comparisons in the long-run relationship among the variables. The countries chosen are Malaysia, Indonesia, Thailand, Singapore and The Philippines. The empirical findings strongly suggest a long-run cointegrating relationship between income inequality and growth volatility with a positive and statistically significant impact. Also, the causality analysis was explored using the Toda and Yamamoto (1995) method of Granger causality. The causality test shows that there exists bidirectional causality from inequality transmission to economic growth volatility. The implications that are developed from this study helps us to understand the various policy reforms in the ASEAN region, that are more transparent and can make these economies less susceptible to risks.
Similar content being viewed by others
References
Acemoglu, D., Zilibotti, F.: Was prometheus unbound by chance? Risk, diversification, and growth. J. Polit. Econ. 105(4), 709–751 (1997)
Aghion, P., Banerjee, A., Piketty, T.: Dualism and macroeconomic volatility. Q. J. Econ. 114(4), 1359–1397 (1999)
Ahmed, A.D., Suardi, S.: Macroeconomic volatility, trade and financial liberalization in Africa. World Dev. 37(10), 1623–1636 (2009)
Aizenman, J., Marion, N.P.: Policy uncertainty, persistence and growth. Rev. Int. Econ. 1(2), 145–163 (1993)
Alvaredo, F., Atkinson, A.B., Piketty, T., Saez, E.: The top 1 percent in international and historical perspective. J. Econ. Perspect. 27(3), 3–20 (2013)
Ang, J.B.: Finance and inequality: the case of India. South. Econ. J. 76(3), 738–761 (2010)
Atkinson, A.B.: Comparing the distribution of top incomes across countries. J. Eur. Econ. Assoc. 3(2–3), 393–401 (2005)
Atkinson, A.B., Morelli, S.: Economic crisis and inequality. In: Llavador, H., Roemer, J.E., Silvestre, J. (eds.) Sustainability in the Presence of Global Warming: Theory and Evidence, vol. 05, pp. 1–70. UNDP, New York (2011)
Atkinson, A.B., Piketty, T., Saez, E.: Top incomes in the long run of history. J. Econ. Lit. 49(1), 3–71 (2011)
Bahmani-Oskooee, M., Nasir, A.B.M.: ARDL approach to test the productivity bias hypothesis. Rev. Dev. Econ. 8(3), 483–488 (2004)
Bara, A., Mudzingiri, C.: Financial innovation and economic growth: evidence from Zimbabwe. Invest. Manag. Financ. Innov. 13(2), 65–75 (2016). https://doi.org/10.21511/imfi.13(2).2016.07
Barro, R.: Inequality and growth revisited. ADB Working Paper Series on Regional Economic Integration No. 11. Asian Development Bank, Manila (2008)
Barro, R.J.: Inequality and growth in a panel of countries. J. Econ. Growth 5(1), 5–32 (2000)
Beck, T., Demirguc-Kunt, A., Levine, R.: Finance, inequality and poverty: cross-country evidence. Bank Policy Research Working Paper, 3338, World Bank, Washington D.C. http://siteresources.worldbank.org/DEC/Resources/Finance_Inequality_and_the_Poor.pdf (2004). Accessed 20 Oct 2019
Behrman, J.R., Birdsall, N., Székely, M.: Economic policy changes and wage differentials in Latin America. Econ. Dev. Cult. Change 56(1), 57–97 (2007)
Bernanke, B.S.: Irreversibility, uncertainty, and cyclical investment. Q. J. Econ. 98(1), 85–106 (1983)
Bianchi, M., Boba, M.: Liquidity, risk, and occupational choices. Rev. Econ. Stud. 80(2), 491–511 (2013)
Bittencourt, M.: Financial development and inequality: Brazil 1985–1994. Econ. Change Restruct 43(2), 113–130 (2010)
Black, Fischer: Business Cycles and Equilibrium. Blackwell, Cambridge (1987)
Blanchard, O. J.: Suggestions for a New Set of Fiscal Indicators. OECD Economics Department Working Papers 79. OECD Publishing (1990)
Bonfiglioli, A.: Equities and inequality. IIES Seminar Paper 737. http://www.diva-portal.org/smash/get/diva2:344408/FULLTEXT01.pdf (2005). Accessed 20 Oct 2019
Bourguignon, F., Verdier, T.: Oligarchy, democracy, inequality and growth. J. Dev. Econ. 62(2), 285–313 (2000)
Breen, R., García-Peñalosa, C.: Income inequality and macroeconomic volatility: an empirical investigation. Review of Development Economics 9(3), 380–398 (2005)
Calderón, C., Servén, L.: The output cost of Latin America’s infrastructure gap. In: Easterly, W., Servén, L. (eds.) The Limits of Stabilization: Infrastructure, Public Deficits, and Growth in Latin America, pp. 95–118. Stanford University Press, Palo Alto CA (2003)
Calderón, C., Yeyati, E.L.,: Zooming. In: From Aggregate Volatility to Income Distribution. Policy Research Working Paper, World Bank (2009). https://doi.org/10.1596/1813-9450-4895
Canavire-Bacarreza, G.J., Rioja, F.K.. Financial development and the distribution of income in Latin America and the Caribbean. IZA Discussion Papers, No.3796, Institute for the Study of Labor (IZA), Bonn (2009). http://nbn-resolving.de/urn:nbn:de:101:1-20081126704
Caroli, E., Garcıa-Penalosa, C.: Risk aversion and rising wage inequality. Econ. Lett. 77(1), 21–26 (2002)
Cevik, S., Correa-Caro, C.: Growing (un)equal: fiscal policy and income inequality in China and BRIC + . IMF Working Paper No. 15/68 : International Monetary Fund, Washington, DC. https://www.imf.org/external/pubs/ft/wp/2015/wp1568.pdf (2015). Accessed 20 Oct 2019
Checchi, D., Garcia-Penalosa, C.: Risk and the distribution of human capital. Econ. Lett. 82(1), 53–61 (2004)
Chinn, M.D., Ito, H.: What matters for financial development? Capital controls, institutions, and interactions. J. Dev. Econ. 81(1), 163–192 (2006)
Chou, Y.K.: Modeling financial innovation and economic growth: why the financial sector matters to the real economy. J. Econ. Educ. 38(1), 78–90 (2007)
Chou, Y.K., Chin, M.S.: Financial innovations and endogenous growth. Department Of Economics, University of Melbourne (2001). https://core.ac.uk/download/pdf/6561643.pdf
Christopoulos, D.K., Tsionas, E.G.: Financial development and economic growth: evidence from panel unit root and cointegration tests. J. Dev. Econ. 73(1), 55–74 (2004)
Claessens, S.: Access to financial services: a review of the issues and public policy objectives. World Bank Res. Obs. 21(2), 207–240 (2006)
Claessens, S., Perotti, E.: Finance and inequality: channels and evidence. J. Comp. Econ. 35(4), 748–773 (2007)
Clemente, J., Montañés, A., Reyes, M.: Testing for a unit root in variables with a double change in the mean. Econ. Lett. 59(2), 175–182 (1998)
Dabla-Norris, E., Kochhar, K., Suphaphiphat, N., Richa, F., Tsounta, E.: Causes and Consequences of Income Inequality: A Global Perspective. IMF Staff Discussion Note No. 15/13. International Monetary Fund, Washington, DC. https://www.imf.org/external/pubs/ft/sdn/2015/sdn1513.pdf (2015). Accessed 20 Oct 2019
David, H., Dorn, D., Hanson, G.H.: The China syndrome: local labor market effects of import competition in the United States. Am. Econ. Rev. 103(6), 2121–2168 (2013)
Davtyan, K.: Interrelation among Economic Growth, Income Inequality, and Fiscal Performance: Evidence from Anglo-Saxon Countries. AQR–Working Papers, 2014, AQR14/03 (2014)
De Dominicis, L., Florax, R.J., De Groot, H.L.: A meta-analysis on the relationship between income inequality and economic growth. Scottish J. Political Econ. 55(5), 654–682 (2008)
De la Torre, A., Didier, T., Ize, A., Lederman, D., Schmukler, S.L.: Latin America and the Rising South: Changing World, Changing Priorities. Washington DC, The World Bank (2015)
Dickey, D.A., Fuller, W.A.: Distribution of the estimators for autoregressive time series with a unit root. J. Am. Stat. Assoc. 74(366a), 427–431 (1979)
Dickey, D.A., Fuller, W.A.: Likelihood ratio statistics for autoregressive time series with a unit root. Economet. J. Economet. Soc. 49, 1057–1072 (1981)
Dollar, D., Kraay, A.: Growth is good for the poor. J. Econ. Growth 7(3), 195–225 (2002)
Dollar, D., Kraay, A.: Trade, growth, and poverty. Econ. J. 114(493), F22–F49 (2004)
Engle, R.F.: Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Economet J. Economet. Soc. 987–1007 (1982)
Fang, W., Miller, S.M., Yeh, C.C. (2015). The effect of growth volatility on income inequality. Econ. Model. 45, 212–222 (2015)
Forbes, K.J.: A reassessment of the relationship between inequality and growth. Am. Econ. Rev. 90(4), 869–887 (2000)
Frankel, J.A., Romer, D.H.: Does trade cause growth? Am. Econ. Rev. 89(3), 379–399 (1999)
Galor, O., Zeira, J.: Income distribution and macroeconomics. Rev. Econ. Stud. 60(1), 35–52 (1993)
Galor, O., Tsiddon, D.: The distribution of human capital and economic growth. J. Econ. Growth 2(1), 93–124 (1997)
García-Peñalosa, C., Turnovsky, S.J.: Production risk and the functional distribution of income in a developing economy: tradeoffs and policy responses. J. Dev. Econ. 76(1), 175–208 (2005)
Gavin, M., Hausmann, R.: Growth with equity: the volatility connection. Beyond tradeoffs: Market Reforms and Equitable Growth in Latin America, pp. 91–109. Inter-American Development Bank and the Brookings Institution, Washington, DC (1998)
Gimet, C., Lagoarde-Segor, T.: A closer look at financial development and income distribution. J. Bank. Finance 35(7), 1698–1713 (2011)
Goldberg, P.: Review Article: Trade and Inequality. Elgar Research Reviews in Economics. Edward Elgar Publishing Limited, Cheltenham (2015)
Goldberg, P.K., Pavcnik, N.: Distributional effects of globalization in developing countries. J. Econ. Lit. 45(1), 39–82 (2007)
Goldsmith, R.W.: Financial Structure and Development. Yale Uni. Press, New Haven (1969)
Granger, C.W.: Investigating causal relations by econometric models and cross-spectral methods. Economet. J. Economet. Soc. 37(3), 424–438 (1969)
Granger, C.W., Newbold, P.: Spurious regressions in econometrics. J. Economet. 2(2), 111–120 (1974)
Hamori, S., Hashiguchi, Y.: The effect of financial deepening on inequality: some international evidence. J. Asian Econ. 23(4), 353–359 (2012)
Hnatkovska, V., Loayza, N.: Volatility and Growth. In: Aizenman, J., Pinto, B. (eds.) Managing Economic Volatility and Crises: A Practitioner’s Guide. Cambridge University Press, Cambridge (2005)
Honohan, P.: Financial development, growth and poverty: how close are the links? In: Goodhart, C.A.E. (ed.) Financial Development and Economic Growth, pp. 1–37. British Association for the Advancement of Science Palgrave Macmillan, London (2004). https://doi.org/10.1057/9780230374270_1
Honohan, P.: Financial sector policy and the poor: selected findings and issues. Working paper No. 43. The World Bank, Washington DC. http://siteresources.worldbank.org/EXTFINANCIALSECTOR/Resources/FinancialSectorPolicyandthePoor.pdf(2004b). Accessed 20 Oct 2019
Hummels, D., Jørgensen, R., Munch, J., Xiang, C.: The wage effects of offshoring: evidence from Danish matched worker-firm data. Am. Econ. Rev. 104(6), 1597–1629 (2014)
Imbs, J.: Growth and volatility. J. Monet. Econ. 54(7), 1848–1862 (2007)
Iyigun, M.F., Owen, A.L.: Income inequality, financial development, and macroeconomic fluctuations. Econ. J. 114(495), 352–376 (2004)
Jalil, A., Feridun, M.: Long-run relationship between income inequality and financial development in China. J. Asia Pac. Econ. 16(2), 202–214 (2011)
Kaldor, N.: A model of economic growth. Econ. J. 67(268), 591–624 (1957)
Kim, D.H., Lin, S.C., Suen, Y.B.: Dynamic effects of trade openness on financial development. Econ. Model. 27(1), 254–261 (2010)
King, R.G., Levine, R.: Finance and growth: schumpeter might be right. Q. J. Econ. 108(3), 717–737 (1993)
Kirkpatrick, C., Sirageldin, I., Aftab, K.: Financial Development, Economic Growth, and Poverty Reduction [with Comments]. Pakistan Dev. Rev. 39(4), 363–388 (2000)
Kose, M.A., Prasad, E.S., Terrones, M.E.: How do trade and financial integration affect the relationship between growth and volatility? J. Int. Econ. 69(1), 176–202 (2006)
Kuznets, S.: Economic growth and income inequality. Am. Econ. Rev. 45(1), 1–28 (1955)
Kwiatkowski, D., Phillips, P.C., Schmidt, P., Shin, Y.: Testing the null hypothesis of stationarity against the alternative of a unit root: how sure are we that economic time series have a unit root? J. Economet. 54(1–3), 159–178 (1992)
Laursen, T., Mahajan, S.: Volatility, Income Distribution, and Poverty. Managing Economic Volatility and Crises: A Practitioner’s Guide, pp. 101–136. Cambridge University Press, New York (2005)
Law, S.H., Tan, H.B.: The role of financial development on income inequality in Malaysia. J. Econ. Dev. 34(2), 153–168 (2009)
Liang, Z.: Financial development and income distribution: a system GMM panel analysis with application to urban China. J. Econ. Dev. 31(2), 1–21 (2006)
Lin, S.C., Huang, H.C., Kim, D.H., Yeh, C.C.: Nonlinearity between inequality and growth. Stud. Nonlinear Dyn. Economet. 13(2), 1558–3708 (2009). https://doi.org/10.2202/1558-3708.1635
Ling-Zheng, Y.U., Xia-Hai, W.E.I.: Has financial development worsened income inequality in China? Evidence from threshold regression model. J. Finance Econ. 3(009). http://en.cnki.com.cn/Article_en/CJFDTotal-CJYJ201203009.htm (2012). Accessed 20 Oct 2019
Loayza, N., Fajnzylber, P., Calderón, C.: Economic Growth in Latin America and the Caribbean: Stylized Facts, Explanations, and Forecasts. The World Bank (2005). https://openknowledge.worldbank.org/bitstream/handle/10986/7315/32180.pdf;sequence=1. Accessed 20 Oct 2019
Lopez, H.: Pro-poor-pro-growth: Is there a trade off? Policy Research Working Paper, 3378. World Bank (2004). http://siteresources.worldbank.org/INTPGI/Resources/15040_WBSWP3378.pdf. Accessed 20 Oct 2019
Lucas, R.E.: Models of Business Cycles, vol. 26. Blackwell, Oxford (1987)
Ma, Y., Jalil, A.: Financial development, economic growth and adaptive efficiency: a comparison between China and Pakistan. China World Econ. 16(6), 97–111 (2008)
McKinnon, R.I.: Money and Capital in Economic Development. Brookings Institution Press, Washington (2010)
Mirman, L.: Uncertainty and optimal consumption decisions. Econometrica 39, 179–185 (1971)
Narayan, P.K.: The saving and investment nexus for China: evidence from cointegration tests. Appl. Econ. 37(17), 1979–1990 (2005)
Neves, P.C., Afonso, Ó., Silva, S.T.: A meta-analytic reassessment of the effects of inequality on growth. World Dev. 78, 386–400 (2016)
Nikoloski, Z.: Financial sector development and inequality: Is there a financial Kuznets curve? J. Int Dev. 25(7), 897–911 (2013)
Pagano, M., Volpin, P.: The political economy of finance. Oxford Rev. Econ. Policy 17(4), 502–519 (2001)
Partridge, M.D.: Is inequality harmful for growth? Comment. Am. Econ. Rev. 87(5), 1019–1032 (1997)
Partridge, M.D.: Does income distribution affect US state economic growth? J. Reg. Sci. 45(2), 363–394 (2005)
Perotti, R.: Growth, income distribution, and democracy: what the data say. J. Econ. Growth 1(2), 149–187 (1996)
Persson, T., Tabellini, G.: Is inequality harmful for growth? Am. Econ. Rev. 84(3), 600–621 (1994)
Pesaran, M.H., Shin, Y.: An autoregressive distributed-lag modelling approach to cointegration analysis. Economet. Soc. Monogr. 31, 371–413 (1998)
Pesaran, M.H., Shin, Y., Smith, R.J.: Bounds testing approaches to the analysis of level relationships. J. Appl. Economet. 16(3), 289–326 (2001)
Phillips, P.C., Perron, P.: Testing for a unit root in time series regression. Biometrika 75(2), 335–346 (1988)
Piketty, T., Atkinson, A.B. (eds.): Top Incomes: A Global Perspective. Oxford University Press, New York (2010)
Pindyck, R.S.: Irreversibility, uncertainty and investment (No. w3307). National Bureau of Economic Research (1990)
Ramey and Ramey: Cross-Country Evidence on the Link Between Volatility and Growth. Am. Econ. Rev. 85(5), 1138–1151 (2005)
Rodriguez, F., Rodrik, D.: Trade policy and economic growth: a skeptic’s guide to the cross-national evidence. NBER Macroecon. Annu 15, 261–325 (2000)
Saint-Paul, G., Verdier, T.: Education, democracy and growth. J. Dev. Econ. 42(2), 399–407 (1993)
Shahbaz, M.: Income inequality-economic growth and non-linearity: a case of Pakistan. Int. J. Soc. Econ. 37(8), 613–636 (2010)
Shahbaz, M., Islam, F.: Financial development and income inequality in Pakistan: An application of ARDL approach. https://mpra.ub.uni-muenchen.de/28222/ (2011)
Shan, J.: Does financial development ‘lead’economic growth? A vector auto-regression appraisal. Appl. Econ. 37(12), 1353–1367 (2005)
Shin, Y., Yu, B., Greenwood-Nimmo, M.: Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. In: Horrace, W.C., Sickles, S.C. (eds.) Festschrift in Honor of Peter Schmidt, pp. 281–314. Springer, New York (2014)
Toda, H.Y., Yamamoto, T.: Statistical inference in vector autoregressions with possibly integrated processes. J. Economet. 66(1–2), 225–250 (1995)
World Economic Forum: ASEAN’s financial development gap (2015) https://www.weforum.org/agenda/2013/06/aseans-financial-development-gap/. Accessed 20 Oct 2019
Data Sources
Feenstra, R.C., Inklaar, R., Timmer, M.P.: The next generation of the Penn World Table. Am. Econ. Rev. 105(10), 3150–3182 (2015)
Solt, F.: The standardized world income inequality database. Soc. Sci. Q. 97(5), 1267–1281 (2016)
World Bank: World Development Indicators (2018). http://data.worldbank.org. Accessed on 21 Apr 2019
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
About this article
Cite this article
Ghosh, S. Impact of economic growth volatility on income inequality: ASEAN experience. Qual Quant 54, 807–850 (2020). https://doi.org/10.1007/s11135-019-00960-z
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11135-019-00960-z